We talked a week ago about what experts from the world’s leading banks and agencies think about the behavior of the EUR/USD pair in the coming 2022. And the fact that we paid attention to it in the first place is quite logical: after all, this pair is the most traded on the Forex market, and the European currency itself leads by a huge margin in the formation of the US Dollar Index DXY, with 57.6%.
Recall that DXY was developed by the US Federal Reserve in 1973 and shows the ratio of the US dollar to a basket of 6 major world currencies. This basket includes euro (57.6%), Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%) and Swiss franc (3.6%).
In our opinion, the economic situation in the world has changed quite a lot over the past almost half a century since the inception of DXY. And at least the Chinese yuan should have appeared in the basket. Therefore, below we will look at the prospects for both the currency pairs that form the dollar index: USD/JPY, GBP/USD, USD/CAD, USD/SEK, USD/CHF, and some other, AUD/USD, NZD/USD, EUR/GBP and USD/CNH.
USD/JPY: Japan Needs a Weak Yen
It is known that inflation, along with the recovery of the labor market, is one of the two main factors that central banks focus on in their monetary policy.
The positive GDP gap is also called the inflation gap, because it indicates that the growth of aggregate demand outstrips the growth of aggregate supply and accelerates inflation. This, according to the IMF, will be observed in the United States (+ 3.3%) and Canada (+ 0.8%) in 2022. And regulators will have to take active steps to tighten their monetary policy in order to contain inflation. And this, according to experts from the Dutch banking ING Group (Internationale Nederlanden Groep), will give the currencies of these countries, primarily the USD, an advantage over the currencies of those countries where GDP has negative gap. It is also called recessionary, since the excess of supply over demand is the path to deflation.
The recession gap has been observed since 2008 in Japan and is likely to repeat in 2022. That is why the policy of the Bank of Japan is one of the most dovish among the central banks of other countries, and the interest rate on the yen has been held at a negative level for a long time, minus 0.1%.
The head of the Bank of Japan, Haruhiko Kuroda, has recently said that a weak yen would rather help the country’s economy than harm it. According to the senior official, if the yen falls, it will support exports and corporate profits.
ING Group believes that such a differentiation between the approaches of the US Federal Reserve and the Japanese regulator will strengthen the dollar’s position against the yen. Their quarterly forecast for USD/JPY for this year is as follows: Q1 – 114.00, Q2 – 115.00, Q3 – 118.00 and Q4 – 120.00.
The French financial conglomerate Societe Generale estimates the probability that the pair will rise to 116.00 in the Q2 at 50%, and up to 118.00 – 25%. Experts bet the remaining 25% on a bearish scenario and the fall of the pair to 110.00.
Analysts from other leading global banks also prefer the dollar. However, unlike their colleagues from ING, a number of forecasts has the peak not at the end, but in the middle of the year. Barclays Bank’s forecast looks like this: Q1 – 115.00, Q2 – 116.00, Q3 – 116.00 and Q4 – 115.00. The CIBC (Canadian Imperial Bank of Commerce) forecast paints a similar picture: Q1 – 115.00, Q2 – 116.00, Q3 – 115.00, Q4 – 114.00.
Reuters interviewed the largest banks represented on Wall Street and published the opinion of their experts regarding the values of the USD/JPY pair in the second half – late 2022. For the most part, forecasts point to a strengthening dollar: JP Morgan Q3 – 114.00, Amundi Q4 – 116.00, Morgan Stanley Q4 – 118.00. On the contrary, Goldman Sachs believes that the pair will fall to 111.00 in 2023.
GBP/USD: At the Crossroads of Three Roads
Regarding the future of the British currency, British investment Barclays Bank has taken a very patriotic stance. His strategists consider the pound to be highly undervalued and predict that the GBP/USD pair will return to the 2021 highs and rise to 1.4200 by the end of the year.
Unlike most investment banks, Barclays believes that the policy of the US Federal Reserve does not provide strong support for the US currency at all, and this will lead to its moderate depreciation. The Bank expects other central banks to take a more aggressive stance than the Fed, with higher interest rates, thereby limiting the attractiveness of the dollar. First of all, of course, we are talking here about the Bank of England.
As for the short-term outlook for the pound, Barclays’ analysts are more cautious here, as the impact of high inflation will neutralize the potential support from a slight increase in interest rates. In addition, concerns about the new wave of COVID-19 and the difficulties with the EU due to Brexit need to be considered. As a result, Barclays’ quarterly forecast is as follows: Q1 – 1.3300, Q2 – 1.3700, Q3 – 1.4000 and Q4 – 1.4200.
Capital Economics, one of the leading independent research centers in the UK, took the opposite position. Its specialists, on the contrary, expect the pound to weaken, and refer to a combination of 1) weak economic growth, 2) slowdown in inflation and 3) slowness of the Bank of England. These three factors may lead to the fact that the regulator of the United Kingdom may raise the rate to only 0.5% in the coming months instead of 1.0%, and thus disappoint the markets.
But, in addition to the growth and fall of the British currency, there is a third scenario. ING Group analysts predict that the pound will be somewhere in the middle of a triangle of a stronger US dollar, stable commodity currencies and weaker low-yielding currencies. Therefore, according to their scenario, the GBP/USD pair will move in a sideways trend: Q1-1.3300, Q2-1.3400, Q3-1.3400 and Q4-1.3400.
Other Currency Pairs
If Barclays Bank believes in its national currency, CIBC (Canadian Imperial Bank of Commerce) specialists are quite pessimistic about the future. In their opinion, the Canadian dollar may become weaker this year. “Markets overestimated the possible actions of the Bank of Canada in 2022,” says CIBC, “and underestimated the Fed in 2022. Recalibration will leave CAD out of favor with investors.” The bank’s forecast for the USD/CAD pair is as follows: Q1-1.2800, Q2-1.2900, Q3-1.3000 and Q4-1.3000.
Experts at HSBC (Hongkong and Shanghai Banking Corporation) believe that some currencies will still be able to hold their ground against the stronger US dollar, including the Australian dollar. HSBC believes that the Reserve Bank of Australia may take a more hawkish position, given the rather strong macroeconomic data.
ING strategists do not exclude that the Australian dollar may benefit from undervaluation and being oversold either. However, taking long positions on the AUD/USD pair, in their opinion, still carries a high risk.
In addition, according to ING experts, together with the euro (EUR/USD) and the Japanese yen (USD/JPY), the Swiss franc will also lag significantly behind the dollar (USD/CHF) in 2022 as well as Swedish Krona (USD/SEK).
Barclays Bank’s forecast for other currency pairs included in the palette of trading instruments of the brokerage company NordFX is as follows: EUR/GBP : Q1 – 0.87, Q2 – 0.86, Q3 – 0.85, Q4 – 0.84 | USD/CHF : Q1 – 0.91, Q2 – 0.90, Q3 – 0.90, Q4 – 0.90 | AUD/USD : Q1 – 0.75, Q2 – 0.76, Q3 – 0.77, Q4 – 0.78 | NZD/USD : Q1 – 0.73, Q2 – 0.73, Q3 – 0.73, Q4 – 0.73 | USD/CAD : Q1 – 1.23, Q2 – 1.22, Q3 – 1.21, Q4 – 1.21 | USD/CNH : Q1 – 6.35, Q2 – 6.30, Q3 – 6.40, Q4 – 6.50.